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Group of Twenty
Meeting of the Ministers and Central Bank GovernorsMarch 13–14, 2009London, U.K.
Global Economic Policies and Prospects
Note by the Staff of the International Monetary Fund
 
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Table of Contents
Executive Summary…………………………………………………………………………...3I. Recent Developments, Prospects, and Risks.........................................................................4A. Recent Developments......................................................................................................4B. Prospects...........................................................................................................................7C. Risks...............................................................................................................................10II. Policy Challenges...............................................................................................................11A. Financial Sector Policies................................................................................................11B. Macroeconomic Policies................................................................................................14III. External Financing Risks and Banking Sector Vulnerabilities in Emerging Economies.18A. Capital Flows and External Financing Pressures...........................................................18B. Banking Sector Vulnerabilities......................................................................................22C. How Have Emerging Economies Responded................................................................24IV. Assessing Fiscal Policy in the Crisis................................................................................26Boxes1. Recent Banking Sector Measures—A Stocktaking...........................................................122. The Role of Financial Linkages in the Transmission of Financial Stress..........................203. Capital Account Crises in Emerging Economies, Then and Now.....................................214. Some Definitions of Fiscal Policy.....................................................................................27Figures1. Current and Forward-Looking Indicators............................................................................52. Financial Markets Remain Under Heavy Stress..................................................................73. Measures of Monetary Policy and Liquidity in Selected Advanced Economies...............16Tables1. Overview of the World Economic Outlook Projections......................................................82. G-20 Countries: Discretionary Measures, 2008-10...........................................................263. G-20 Countries: Overall Balance, Automatic Stabilizers and Discretionary Measures....294. G-20 Countries: Impact of Fiscal Expansion on Growth...................................................325. Headline Support for the Financial Sector and the Upfront Financing Need....................34Appendix1. Discretionary Fiscal Measures: G-20 Country Breakdown, 2008-10................................372. Overall Balance, Automatic Stabilizers and Discretionary Measures:G-20 Country Breakdown.............................................................................................38
 
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Executive Summary
Global economic activity is falling 
 —with advanced economies registering their sharpest declines inthe post-war era—notwithstanding forceful policy efforts.
 According to the latest IMF forecast,
global activity is expected to decline by around ½ to 1 percentin 2009 on an annual average basis, before recovering gradually in the course of 2010.
Turning around global growth
 
will depend critically on more concerted policy actions
 
to stabilize financial conditions as well as sustained strong policy support to bolster demand.
 
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Restoring confidence is key to resolving the crisis, and this calls for tackling head-on problems in the financial sector. Policymakers must resolve urgently balance sheet uncertainty bydealing aggressively with distressed assets and recapitalizing viable institutions.
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Since financial market strains are global, greater international policy cooperation iscrucial for restoring market trust. Monetary policy should be eased further by reducing policy rateswhere possible, and supporting credit creation more directly.
 Delays in implementing comprehensive policies to stabilize financial conditions would result in a further intensification of the negative feedback loops between the real economy and the financial  system, leading to an even deeper and prolonged recession.Two additional issues will have a significant impact on the outlook:
the effectiveness of the fiscal policy response to the crisis; and external financing risks and banking sector vulnerabilities inemerging economies.
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The estimated growth and employment effects from the fiscal stimulus announced so far,including from the operation of automatic stabilizers, are estimated to be large.
Discretionary
 
fiscal stimulus being provided by G-20 countries is sizeable, but falls short of the 2 percent of aggregate GDP in 2009 and 2010 recommended by the Fund, particularly in 2010. Given the likely protracted nature of the downturn, countries with fiscal room should plan to sustain stimulus in2010.
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Upfront government financing needs related to financial sector support are sizeable, but this support is critical to stabilize the financial system and for restoring confidence.
At the sametime, reinforcing fiscal credibility is paramount. Thus, fiscal support needs to be anchored by asustainable medium-term fiscal framework.
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Capital account pressures are intensifying for many emerging economies, amidst acontraction in cross-border lending.
Some governments may have to support domestic corporatesunable to raise financing to fulfill their rollover needs. Emerging economy banks, especially inemerging Europe, may need to be recapitalized in view of prospective losses. As the crisis prolongs, an increasing number of emerging economies will find room for policy maneuver  becoming increasingly limited. Large-scale official support is likely to be needed from bilateral andmultilateral sources.
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